Morocco rings in good news for Arab Spring bonds
Dubai, December 22, 2012
By Mala Pancholia and Rachna Uppal
Morocco's spectacular debut in the dollar-denominated bond market this month is good news for other countries that have been affected by the Arab Spring uprisings and may try to borrow money overseas next year.
The Moroccan government's success in issuing $1.5 billion of bonds, which drew about $12 billion in orders and were bought mostly by US-based investors, was partly due to low yield levels globally and foreign investors' desperation for returns.
But it also signalled investors were willing to accept a substantial amount of political risk in the Arab world - which is heartening for countries such as Egypt and Tunisia, where governments are struggling to finance budget deficits but have recently faced flare-ups of political unrest.
"There could be a strong bid for bonds from North African countries, provided the domestic political situation can be resolved," said Raza Agha, chief economist for the Middle East and Africa at VTB Capital in London.
He estimated high external and budgetary financing requirements in Egypt, Morocco and Tunisia could prompt each of those countries to issue between $500 million and $1.5 billion of bonds internationally next year.
Some of the debt may be in the form of sukuk, since all of the countries are laying the legal framework for issues of Islamic bonds, Agha noted.
Morocco has not experienced revolutions like Egypt and Tunisia, but it faces similar political and economic pressures.
The monarchy responded to the Arab Spring last year by ceding more of its power over political, economic and security affairs to the elected government, but it risks further mass protests for greater democracy. Meanwhile, the euro zone's economic slump has seriously damaged Morocco's trade and state budget.
That made this month's smooth bond issue impressive - especially Morocco's ability to sell $500 million of debt in the form of ultra-long, 30-year bonds, which appeared to be a vote of confidence in the country's long-term future.
The strong secondary market performance of the bonds since issue has been even more impressive, suggesting investors who failed to buy the paper in the primary market are willing to pay a premium for it.
The $1 billion, 4.25 per cent, 10-year tranche was bid at 100.4 cents on the dollar on Thursday, up from an issue price of 99.2. The $500 million, 5.5 per cent, 30-year tranche was bid at 101.5, up from 97.5.
A substantial number of investors appears to be calculating that Morocco's political tensions can be managed, while aid from Gulf states and the international community - in August the International Monetary Fund approved a $6.2 billion, two-year precautionary line of credit for Morocco - will prevent economic disaster.
Morocco has an advantage over many of the Arab Spring states; it has an investment-grade credit rating, BBB- from Standard & Poor's.
Nevertheless, the secondary market performances of the other countries' bonds over the last several weeks suggest investors are making similar calculations there.
Egypt, for example, has been engulfed in political turmoil over an effort by President Mohamed Mursi to give himself more power and push through a controversial new constitution.
Cairo has had to postpone a request for a $4.8 billion IMF loan, and suspend planned tax increases that would have helped it secure the aid.
But the yield on the country's $1 billion, 10-year bond , issued in 2010, has risen only about 70 basis points to 5.83 per cent since the crisis began in late November.
That is smaller than spikes of 1 percentage point or more that occurred at times of political tension in 2011 and early 2012, and the yield remains far below this year's peak above 8 per cent.
Similarly, Tunisia has experienced an upsurge of unrest with the approach of next year's elections. A Tunisian policeman was killed during clashes with suspected Islamist fighters near the border with Algeria last week; early this month, police broke up fighting in Tunis when pro-government Islamists attacked labour union members.
But the yield on the country's 400 million euro bond , issued in 2005 and maturing in 2020, has stayed flat at around 5.30 percent - its lowest level since January 2011, at the time of the Tunisian revolution.
One factor supporting the prices of North African bonds is the prospect of more investment in them from the oil-rich Gulf.
Gulf companies have shown increasing interest in buying North African assets under new governments created by the Arab Spring - Dubai's Emirates NBD said on Thursday that it would buy the Egyptian banking arm of BNP Paribas - and portfolio investment in fixed income is expected to follow.
Interest could be boosted further if the North African governments issue debt in the form of sukuk, because of the large pool of cash-rich Islamic funds in the Gulf.
Last month Abu Dhabi-based asset manager Invest AD launched a fixed income fund that will focus on the Middle East and Africa.
"I believe Gulf investors are already looking at North African opportunities..." said Invest AD portfolio manager Dilawer Farazi. "We expect more issuance from this region given the funding requirements, and we expect regional investors to participate."
The only Arab Spring-affected country with its bond yields in a clear uptrend is Jordan, which was rocked by violent protests in November over fuel subsidy cuts.
King Abdullah has made some constitutional reforms and his counsellors say turnout at a parliamentary poll in January will test public support for the pace of political change.
The performance of Jordan's $750 million bond maturing in 2015 suggests investors may be less confident than they are in the cases of Egypt and Tunisia that the country has found a model to resolve political and economic problems.
The bond's yield is down from peaks above 6 per cent in early 2011, but has been trending up since the second quarter of this year and has now reached 5 per cent.
Earlier this year Jordan was considering an international, conventional bond issue of up to $1.5 billion to cover some of its financing needs, but the issue did not materialise. In September, parliament passed a law allowing a sovereign sukuk issue, but it is unclear when that might occur.-Reuters